A recent NSW Court of Appeal decision highlights the importance of clearly defining the scope of reinsurance cover, rather than relying on a presumption that cover will always be held to be back-to-back with the underlying insurance:  Metlife Insurance Ltd v RGA Reinsurance Company of Australia Ltd [2017] NSWCA 56

Retreat from the treaty

In 2006, MetLife and RGA entered into an addendum of a 2003 treaty reinsuring MetLife’s liabilities under its “Blue Ribbon Policy”. This policy provided death and total and permanent disablement (TPD) cover for members of the New South Wales Police Force. The addendum included the following “initial event sentence”:

“For a claim to be eligible for consideration under the reinsurance arrangement the initial event leading to or contributing to the claim must occur after the date of the effect of the treaty”

A dispute arose between the parties as to the effect of this sentence.

The issue initially before McDougall J in the Supreme Court was whether the initial event sentence operated to deny MetLife’s entitlements under that addendum in circumstances where the initial event leading or contributing to a claim for disablement occurred prior to the inception of the treaty.  His honour held that the loss must fall within both the contract of reinsurance and the underlying contract of insurance. Accordingly, the initial event sentence operated to preclude MetLife from claiming under the reinsurance treaty for pre-treaty events.

Don’t be presumptuous  

The Court of Appeal considered whether the initial event sentence qualified the obligations of RGA or whether it merely qualified the scope of MetLife’s authority to settle a claim unilaterally (i.e. without the preapproval of RGA).

MetLife’s argument was that the initial event sentence was part of the Claims Handling Limits and merely imposed a qualification upon the class of claims in respect of which RGA would follow the settlement decisions of MetLife. MetLife also argued that the initial event sentence was insufficiently clear to displace the back-to-back presumption to be applied when construing reinsurance contracts.

The Court of Appeal noted that whichever construction was adopted the initial event sentence was poorly placed. However, on MetLife’s interpretation of the construction, the sentence did not appear to serve any sensible commercial purpose and the ordinary meaning was not consistent with the construction contended for by MetLife.  In such circumstances, no back-to-back presumption could override the clear scope of the reinsurance cover.  McDougall J’s decision was therefore upheld.